No More Bribes for Homeowners

The disappointing September jobs report has re-ignited the talk about a second stimulus package.  It has also brought to the center of attention a variety of expiring provisions ranging from enhanced unemployment benefits and subsidies for COBRA health insurance to the $8,000 first-time homebuyers tax credit.  Paying families to prop up the housing market is a bad idea that Congress should not renew.

The flaws of this policy are almost too numerous to list.  To begin, it represents yet another policy to shift the playing field in favor of owner-occupied housing.  Since the inception of the income tax in 1913, mortgage interest has been deductible.  Over the nearly 100 years since, a bipartisan effort has yielded subsidies to construct low-income housing, loan guarantees, two government-sponsored mortgage giants in Fannie Mae and Freddie Mac, and ceaseless other approaches to raising the fraction of Americans who are homeowners.  Why?  There is not any compelling evidence that owning a home improves citizenship, social cohesion, or any other of its supposed virtues.  And it is certainly the case that shifting scarce capital away from new technologies and into new condos hurts our competitiveness.  Bribing first-time homebuyers is just another chapter in this misguided history.

More recently, the U.S. economy is suffering from the fallout of a housing bubble.  That bubble was built on a foundation of the Federal Reserve’s low-interest rate policy, augmented by sustained efforts to meet goals for low-income and minority homeownership.  In short, on top of everything else, policies were constructed so as to get as many more people – often of the most marginal financial means – to buy homes.  Eventually, these policies backfired as it became apparent that too many people were in homes they could not really afford.

The solution?  Put $8,000 on the table to lure new people into these homes.  Congress is evidently unfamiliar with the notion that repeating the same action and expecting a different result is insanity.

I’m not sure if it is worse if the policy “works” or if it doesn’t, but it likely won’t.  The $8,000 first-time homebuyers tax credit is straight out of the same pool of bad ideas that gave us the misbegotten “cash for clunkers” program.  The latter produced essentially no environmental or energy-security benefits (not too surprising when you could get $3,500 for simply raising your mileage by only four miles-per-gallon) – just as a homeownership push has no real benefits.

Cash for clunkers was a superficial “success” from a sales point of view; we saw all those cars driven off the dealers’ lots powered by taxpayer subsidies.  Similarly, a check from Uncle Sam has sweetened home sales.  But most of the cash for clunkers sales would likely have taken place anyway, albeit later in 2009 or in 2010.  All the program did was steal sales from the future and provide a midsummer bump that will soon fade.  Similarly, more cash for homeowners will not represent real recovery in the housing market; it will just mean that next year and the year after will see less sales.

There are two fundamental problems facing the housing market.  Many mortgage holders cannot afford their terms – it is a mismatch of housing costs and financial capacity.  Many others are in houses that are no longer as valuable as the outstanding balance on their mortgages.  The first group needs better economic prospects.  The latter need mortgages that reflect the fact that their equity is simply gone.

A $8,000 tax credit does nothing for either group, addresses no real problem, and should simply go away.